Why Are Mutual Funds Being Recategorized?
SEBI wants to make it easy for a customer to choose a mutual fund according to his needs and ability. According to the regulator, AMCs use these names as marketing tools to attract customers and many of the new buyers may not fully understand the scheme. So SEBI wants MF companies to distinguish different schemes in terms of asset allocation and investment strategy. The regulator also wants to bring in a uniformity in similar schemes launched by different mutual funds so that an investor finds it easier to compare the products before buying.
That is why in its October 6, 2017, circular MF categorization, SEBI while laying down the categories of schemes, described each scheme’s characteristics. The regulator mandated fund houses to categorize all their existing and future schemes into five broad categories and 36 sub-categories. The five broad categories are – equity funds, debt funds, hybrid funds, solution-oriented funds and other funds.
There is clear classification as to what is a large cap, mid cap or a small cap company
|Large Cap Company||1st to 100th company in terms of full market capitalization|
|Mid Cap Company||101st to 250th company in terms of full market capitalization|
|Small Cap Company||Companies beyond 250th company in terms of full market capitalization|
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SEBI Categorization of Equity Mutual Funds
|Equity Portfolio||Portfolio Construction|
|Large Caps||to invest at least 80% in large caps|
|Large & Mid Caps||to invest at least 35% in large caps and at least 35% in mid caps|
|Mid Caps||at least 65% in mid caps|
|Small Caps||at least 65% in small caps|
|Multi Caps||at least 65% in equities & no market-cap wise restriction|
|Dividend yield||at least 65% in equities but in dividend yielding stocks|
|Contra||at least 65% in equities (A fund house can either offer a contra or a value fund not both)|
|Value||at least 65% in equities (A fund house can either offer a value or a contra fund but not both)|
|Focused||at least 65% in equities but can have a maximum of 30 stocks|
|Sectoral or Thematic||at least 80% in chosen sector stocks|
|ELSS (Equity Linked Savings Scheme)||at least 80% in equities|
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SEBI Categorization of Debt Mutual Funds
|Debt Funds||Portfolio Construction|
|Overnight funds||holding portfolio with maturity of upto 1 day|
|Liquid funds||holding portfolio with maturity of upto 91 day|
|Ultra Short Term Funds||holding portfolio with maturity 3-6 months|
|Low duration||holding portfolio with maturity 6-12 months|
|Money market||holding portfolio of money market instruments with maturity of upto 1 year|
|Short duration||holding portfolio with maturity 1-3 years|
|Medium duration||holding portfolio with maturity 3-4 years|
|Medium to long duration||holding portfolio with maturity 4-7 years|
|Long duration||holding portfolio with maturity more than 7 years|
|Dynamic bond Funds||can invest across durations|
|Corporate bond Funds||atleast 80% in corporate bonds (AA+ & above)|
|Credit risk fund||atleast 65% in corporate bonds below AA|
|Banking and PSU||atleast 80% in instruments issued by banks, PSU undertakings, municipal corporations, etc.|
|Gilt Fund||atleast 80% in instruments issued by government across periods|
|Gilt with 10-year constant duration||atleast 80% in instruments issued by government across periods such that average maturity is 10 years|
|Floater Funds||atleast 65% in floating rate instruments|
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SEBI Categorization of Hybrid Mutual Funds
|Hybrid Funds||Portfolio Construction|
|Conservative hybrid funds||10 to 25% equity allocation and 75 to 90% in debt|
|Balanced hybrid funds||40 to 60% equity allocation and 40 to 60% in debt|
|Aggressive hybrid funds||65 to 80% equity allocation and 20 to 35% in debt|
|Dynamic Asset Allocation||Equity/debt – dynamic allocation|
|Multi-Asset funds||invest in at least 3 assets with minimum of 10% in each|
|Arbitrage fund||65% in arbitrage opportunities|
|Equity Savings||Equity – 65%, debt 10% and rest in hedged and unhedged instruments|
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SEBI Rationalization of Other Schemes
|Other Schemes||Portfolio Construction|
|Index Funds||95% in securites of a particular index|
|FOFs||95% in the underlyring fund|
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SEBI Categorization of Solution Oriented Mutual Funds
|Solution Oriented||Portfolio Construction|
|Retirement Fund||Schemes having lock-in for at least 5 years or till retirement age whichever is earlier|
|Children Fund||Schemes having lock-in for at least 5 years or till the child attains 18 whichever is earlier|
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Source: SEBI Circualr
These changes, SEBI hopes, will enable investors to know where the scheme invests. What is the level of risk involved and how much return an investor should expect?
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Frequently Asked Questions
SEBI has changed the categorization of mutual funds to improve clarity and risk disclosure for investors. Mutual funds are now classified into five categories: Equity, Debt, Hybrid, Solution Oriented and Others.
Scheme names have also been changed to indicate the risk involved in the investment clearly.
A lock-in period has been introduced for Solution Oriented Schemes like children’s funds and retirement funds. But the lock-in period does not apply to existing investors.
Fund houses must also modify other aspects of the scheme, such as investment mandate, benchmark, and investment strategy, to align with the new regulation.
The new categories and the sub categories of mutual fund schemes are as follows:
Equity Mutual Fund: 10 Subcategories – large-cap, large & mid-cap, mid-cap, small-cap, multi-cap, focussed, value, contra, dividend yield, sectoral/thematic and ELSS funds.
Debt Mutual Fund: 16 Subcategories – overnight, liquid, money market, ultra-short duration, low duration, short duration, medium duration, medium to long duration, long duration, corporate bond, dynamic bond, credit risk, floater, banking & PSU, Gilt Fund, and Gilt fund with 10-year constant duration.
Hybrid Mutual Fund: 6 Subcategories – conservative hybrid, balanced hybrid, balanced advantage, aggressive hybrid, multi-asset allocation, arbitrage and equity savings fund.
Solution-Oriented Funds: 2 Subcategories – Retirement and Children’s fund. These schemes have a lock-in period of at least 5 years.
Other Funds: 2 Subcategories – Index and Fund of Funds.
SEBI’s categorization and rationalization of mutual fund schemes will provide clarity for investors and assist them in selecting a fund that aligns with their investment goals. The changes in the mutual fund industry include: portfolio restructuring, improved understanding of risk, reduction of mis-selling, and an increase in assets under management.